Common Ownership along the Supply Chain and Corporate Earnings Management

48 Pages Posted: 29 Mar 2022 Last revised: 30 Mar 2022

See all articles by Lei Gao

Lei Gao

George Mason University

Jianlei Han

Macquarie University - Faculty of Business and Economics

Jeong-Bon Kim

Simon Fraser University; City University of Hong Kong

Zheyao Pan

Macquarie University

Date Written: March 30, 2022

Abstract

This study investigates the relation between common institutional ownership along the supply chain and earnings management by supplier firms. Using a sample of U.S. publicly traded firms for the period of 1980–2016, we find that common ownership along the supply chain reduces the level of a supplier’s discretionary accruals, suggesting that it discourages the supplier firm from engaging in upward earnings management via manipulation of discretionary accruals. This effect is more pronounced for firms with greater relationship-specific investments, lower information transparency, and higher levels of product market threat. We further find that common ownership also reduces the extent to which the supplier firm engages in real earnings management. The above findings are robust to potential endogeneity checks. Overall, our results suggest that common institutional ownership along the supply chain plays a significant role in curbing opportunistic earnings management, both accrual-based and real, by the supplier firm.

Keywords: Supply Chain; Common Institutional Ownership; Earnings Management; Institutional Investors.

JEL Classification: M40; G23; G32.

Suggested Citation

Gao, Lei and Han, Jianlei and Kim, Jeong-Bon and Pan, Zheyao, Common Ownership along the Supply Chain and Corporate Earnings Management (March 30, 2022). Available at SSRN: https://ssrn.com/abstract=4051286 or http://dx.doi.org/10.2139/ssrn.4051286

Lei Gao (Contact Author)

George Mason University ( email )

Fairfax, VA 22030
United States

HOME PAGE: http://sites.google.com/view/lei-gao/home

Jianlei Han

Macquarie University - Faculty of Business and Economics ( email )

Sydney, New South Wales 2109
Australia

Jeong-Bon Kim

Simon Fraser University ( email )

8888 University Drive
Burnaby, British Colombia V5A 1S6
Canada

City University of Hong Kong ( email )

Department of Accountancy
83 Tat Chee Avenue
Kowloon Tong
Hong Kong
852-3442-7909 (Phone)

Zheyao Pan

Macquarie University ( email )

North Ryde
Sydney, New South Wales 2109
Australia

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